Google's search for bids

Commentary: Timing looks good for IPO, tailwind would be even better

By

BambiFrancisco

SAN FRANCISCO (CBS.MW) -- If Google pulls off its IPO, it may have to consider pricing in a stiff tailwind.

On Monday, the demand seemed tepid for this highly-anticipated offering. It will take a last-minute rush of orders to make the Google IPO work in time for what the company hopes will be a Tuesday evening offering, according to a person familiar with bids received by one of the participating brokers.

It's not even that investors aren't bidding the proposed price of between $108 and $135, but that Google
GOOG, +1.66%
isn't getting enough bids at all, according to the banker, who asked not to be identified.

Then again, what's the advantage of putting in bids early? Investors may just be waiting until the last minute to see where Yahoo
YHOO, +0.85%
ends up trading to get a better proxy on where to bid. Or, they may be trying to game or manipulate this auction.

In other words, they may say that they won't touch shares, or that they'll only buy shares at, say, $70 per share, but they'll really be bidding $100. The strategy is to get the majority of bids coming in well below the market clearing price, which is the highest price at which all demand can be fulfilled. If that clearing price is $80, then the bids at $70 are less likely to be filled than a bid that comes in at $100.

It may be that an overwhelming number of bids will come in on Tuesday, especially now that Google asked the U.S. Securities and Exchange Commission to make its registration statement effective.

Typically, that step is immediately followed by trading of shares.

To that end, Google may be relieved that the market is coming back just in time for its public debut.

Uncanny timing

If Google's IPO does go, it's actually good timing -- at least compared to the past six weeks.

Just in the nick of time, the Internet sector appears to be coming back to life.

If Google were to have priced at the start of July, it would have watched its shares crumble with the market. The Internet Holdrs fell 22 percent between the beginning of July and the first week in August.

Unless we've hit a sector bottom, this time is as good as any.

Besides, the plethora of bad press has likely substantially lowered expectations. And, when expectations are low, investors tend to overreact to the upside at any positive catalyst. They'll change sentiment in a blink of an eye.

Tailwind or headwind?

To be sure, Google's performance depends on whether it prices in a tailwind or a substantially discounted price that will place its shares in more hands.

If Google were to sell at the highest price at which all demand for its 25 million shares would be met, it might be a poor strategy because Google and its bankers would ignore the demand at lower prices.

Based on MarketWatch's ongoing poll, 94 percent of the 7,800 who cast their votes said they'd stay away or pay less than the proposed $108 and $135 price range for Google shares. Even if institutional investors up the ante with last-minute bids of $100 and more, Google has the right to determine where to set its price.

Most likely, Google will follow in the footsteps of other auctioned offerings, like Overstock.com, whose Dutch auction process put 12 percent of its shares into the hands of small investors and 88 percent into the hands of institutions. In a traditional IPO, essentially no small investor gets an allocation.

But in order to spread the wealth, Overstock had to lower the price.

Overstock
OSTK, -1.16%
went public at $13 per share through a Dutch auction. Overstock CEO Patrick Byrne said that his company would have been able to price at $15 because there was enough demand at that price. Those who bid at that price and above would have received 92 percent of what they bid for, he said. But by pricing the stock at $13, "everyone who had bid above that got a 56 percent allocation," he said.

In effect, Overstock had a tailwind priced into the stock.

It wasn't much of a tailwind.

Overstock shares traded up modestly in its first day of trading. Shares rose a quarter of a percent on its debut day, according to Thomson Financial.

But the performance months down the road left little to be desired. The average performance of the eight W.R. Hambrecht Dutch auctioned IPOs was down more than 9 percent after two months of trading. For some of these stocks, the share price is at half the price. Red Envelope
REDE
which went public at $14, now trades at $7.

Additionally, the amount of shares available to be sold down the road is practically 10 to 1. Typically, a company sells about 15 to 20 percent of its shares to the public, making the overhang of Google shares down the road, well, a significant overhang.

According to Google's filing, it says: "Understand that 4,575,048 of our shares become available for sale starting as early as 15 days after our initial public offering and that additional shares become available at various times thereafter such that 264,188,725 shares are available for sale within 180 days after our initial public offering."

That's a heck of a lot of shares.

My bid: 42

I'm not bidding on the stock, but if I did, I'd bid $42.

That number, 42, -- the ultimate answer to life, the universe and everything -- seems a reasonable bid for Google.

I know. It's unconventional logic, as provided by the Hitchhiker's Guide to the Galaxy. But an unconventional company, in an unconventional auction begets unconventional bids.

So did you bid on Google shares? If so, at what price, and how many shares did you receive? Send me an e-mail at my blog page.

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